By Barani Krishnan
Investing.com -- There are markets, and then, there’s the economy, which is always greater. Fears that U.S. growth might be choked by rate hikes that could be a lot higher than thought triggered on Tuesday the worst selloff in oil in two months.
New York-traded West Texas Intermediate, or WTI, settled at $77.58, per barrel, down $2.88, or 3.6%, on the day. The last time the U.S. crude benchmark fell more in a session was on Jan. 3, when it fell 4.2%. The latest plunge came a day after WTI closed above $80, the first time in three weeks.
London-traded Brent crude settled at $83.29, down $2.89, or 3.4%. The last time the global crude benchmark fell more was on Jan. 3, when it lost 4.4%. Tuesday’s plunge also came after Brent settled above $86 on Monday, the first time in three weeks.
“Oil has had a nice start to the month, but lingering demand concerns and further oil inventory increases should cap this rebound,” Ed Moya, analyst at online trading platform OANDA, said, referring to last week’s surge of more than 4% in both WTI and Brent, that was briefly extended by Monday’s run-up.
“Oil looks like it might need to trade in a range a little longer until we have a clearer outlook for the U.S. economy,” said Moya. “The debate over what type of recession will hit the U.S. economy will not be answered in a couple of months’ time, so we might see conservative calls for demand to remain healthy over the short-term.”
Crude prices tumbled as the dollar spiked instead after Federal Reserve Chair Jerome Powell warned that U.S. interest rate hikes could end up being a lot higher than once imagined, saying the fight against inflation had a long way to go.
“The ultimate level of interest rates is likely to be higher than previously anticipated,” Powell said in the Fed’s semi-annual testimony to Congress. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
Soon after the release of Powell’s speech before its delivery in Congress, the Fed-funds-futures — which serves as a barometer for upcoming rate decisions — priced in a 50-basis point hike for March 22, when the central bank is to decide on rates again. Prior to that, the Fed had been expected to adopt a hike of just 25 basis points.
“It's interesting that he's leaving the 25 vs 50 bps debate open,” economist Adam Button said, referring to Powell’s comments, in a post on the ForexLive forum. “This is a greenlight for [greater] hiking.”
The Consumer Price Index, a broad gauge of inflation, hit a 40-year high of 9.1% in the United States during the year to June 2022. It has moderated since, to an annualized growth of 6.4% in January, but remains well above the Fed’s target of just 2% per year.
To clamp down on runaway price growth, the Fed added 450 basis points to interest rates since March last year via eight hikes. Prior to that, rates stood at nearly zero after the global outbreak of the coronavirus in 2020.
The Fed’s first post-COVID hike was a 25-basis point increase in March last year. It then moved up with a 50-basis point increase in May. After that, it executed four back-to-back jumbo-sized hikes of 75 basis points from June through November. Since then, it has returned to a more modest 50-basis point increase in December and a 25-basis point hike in February.
“Although inflation has been moderating in recent months, the process of getting inflation back down to 2 percent has a long way to go and is likely to be bumpy,” Powell said. “Recent economic data, particularly inflationary pressures, have been stronger than expected.”
One of the Fed’s biggest challenges has been stellar jobs data as the nation’s labor market continues to stun economists with stupendous growth month after month.
Non-farm payrolls growth for January was the strongest since July 2022, when the Labor Department reported jobs creation at 528,000. Economists polled by U.S. media had only forecast a jobs growth of 188,000 for January. The outperformance pushed down the unemployment rate to 3.4% from December’s 3.5%.
While policymakers the world over typically celebrate on seeing good jobs numbers, the Fed is in a different predicament. The central bank wishes to see an easing of conditions that are a little “too good” now for the economy’s own good — in this case, unemployment at more than 50-year lows and average monthly wages that have grown without stop since March 2021.
Such job security and earnings have cushioned many Americans from the worst price pressures since the 1980s and encouraged them to continue spending, further feeding inflation.
Expectations are for the economy to have added 203,000 jobs last month, moderating from January’s blistering jobs growth of 517,000, while the unemployment rate is expected to hold steady at a more than five-decade low of 3.4%.
Economists say monthly jobs numbers need to grow meaningfully below expectations to create some ding at least in employment and wage security which the Fed suggests are its biggest two headaches now in fighting inflation.